The High Price of Innovation

The pharmaceutical industry has long been a source of controversy, with a public perception that is often marked by suspicion prior to the Covid-19 pandemic, according to Gallup polls only the federal government was held in worse regard than pharma. From concerns over skyrocketing drug prices to accusations of putting profits before patients, the industry's reputation has faced numerous challenges. Admittedly, the world of pharma is not without its shortcomings; the occasional opportunism of some players to prioritize profits does exist - one needs only to remember the Sovaldi scandal in 2013, when Gilead’s revolutionary cure for Hepatitis-c was priced at $84,000 upon release, making the Californian giant double its revenue from $11 billion to $25 billion. It is also true that when observing some of the basic facts around the pharma industry in the U.S., one will inevitably find some conspicuous figures. First example: the U.S. spends more on prescription drugs per capita than any other country in the world, with an average cost of $1.443 per person in 2019. Second example: prices have increased dramatically over the past decade, with some drugs seeing price hikes of over 500%. When talking about costs and prices, it is necessary to recall some core facts that are often forgotten. Developing new drugs is a complex and expensive endeavor for pharmaceutical companies, each new development estimated at around $2.6 billion. The process typically involves much investment risk and years of research and testing, including pre-clinical trials, clinical trials, and FDA approvals. Furthermore, the U.S. has a unique pricing ecosystem that involves insurance companies and other intermediaries (Pharmacy Benefit Managers, or PBMS) that double the price of most medications.

DAVID RICKS | CEO, ELI LILLY

Companies have periods of big losses followed by big profitability and only the largest pharma companies have a running business model. What people don't understand is that sales of today finance the cures of tomorrow.

In our case, US$ 1 out of US$ 4 people pay for in their medicines goes into researching a disease they don't have - but might one day have.

STEPHEN BRADY | CEO, TEMPEST THERAPEUTICS

Capital markets have been volatile, and fundraising is more difficult. Companies with commercialization rights to programs have the potential optionality to combine business development and financings.

JEFF CAMBRA | CEO, Spinafx MEDICAL

Many of the venture capitalists (VCS), private investors and family offices that we are speaking with right now are very reserved and more selective than what we have seen in the past.

This means that, on average, pharma companies get 50 cents out of every dollar. But before unraveling the complexity of the nation’s entire healthcare systems, some in the industry are trying to find ingenious ways to lower costs. One example is that of Beigene, a global company aiming for this objective through their clinical trials : “up to 90% of the total cost of developing a medicine is tied up in the upfront clinical trial phase, and most clinical trials are run in wealthy countries and thus are not highly inclusive. But if more companies would run global clinical trials, as Beigene does, we could as an industry reduce the time to enroll and conduct trials, reducing costs overall,” says CEO John Oyler. On the flip side, Michael Laranjo, Otsuka Canada Pharmaceuticals’ CEO, talks about all the money that the life sciences save further down the line: “the truth is that some drugs help keep patients out of hospitals.” In other words, these drugs reduce the costs for both the system and patients by preventing complications. Ocugen’s CEO Shankar Musunuri, mirrors this attitude, claiming that “accessibility is also critically important'' and that “it is not good enough to bring breakthrough gene therapies to market if patients cannot afford them. We need to be diligent in pricing if we want the most vulnerable populations to have access to treatment.”

It is true that much of the cornucopia of innovations North America has experienced in the past decades is linked to the existence of a potential financial reward, which in turn is linked to ‘free’ prices. Joe Panetta from Biocom California argues for this point: “The U.S. has a very different economic model in relation to healthcare than the rest of the world (...) Here we have an incentive-based, open market system for healthcare and for the development of drugs. This has historically served as an advantage for the industry, fueling the development and commercialization of the most cutting-edge medical technologies and therapies the world has ever seen, alongside a free market providing open access.” In other words, the industry develops because investors inject capital confident that they will enjoy returns - and these only arrive in a free market. If the market was to be more strictly regulated, costs would be lower for patients, but many fear that innovation would stagnate - a fear that might reify with the recent passing of the Inflation Reduction Act in the U.S.